Potential Ways to Profit From the Target Data Breach

Prior to revealing how you might be able to profit from the Target (NYSE: TGT) data breach, let's first go over the most recent updates on this massive event that affected up to 30% of the U.S. population.

Approximately one week ago, IntelCrawler -- a software intelligence company -- named 17-year-old Sergey Tarasov as the person behind the data breach. Tarasov is expected to have played a role in the malware attack on Target, but the man behind the plot is now expected to be Rinat Shibaev, also known as "Ree4." As far as Tarasov goes, he is expected to have played the role of technical support, but he denies any involvement. He also claims not to have any connection to Shibaev. Both persons of interest are expected to be from an Eastern European country, which is widely believed to be Russia.

According to IntelCrawler CEO Andrew Komarov, the guilty party was selling the malware, named BlackPOS, for $2,000 or 50% of all intercepted credit cards. Komarov also stated that more breaches are possible at other retailers. Numerous reports indicate that as many as three to five other retailers might have been affected, but news about breaches at other companies has yet to become public information. Furthermore, Komarov believes that 40 versions of BlackPOS have been sold since March 2013, and that any attempts by retailers to improve security might be met with manipulation of mutated malware to combat this. For the record, Target is spending $5 million on improving its digital security.

All of this is somewhat depressing for American consumers. If not depressing, it's at least a nuisance. If three to five other retailers have been affected aside from Target and Neiman Marcus, then consumers are going to hesitate to use their debit cards as much as they have in the past. Based on all the widespread reports about the dangers of using a debit card that have hit the Internet since the Target data breach, it's a near guarantee that debit card usage will decline. Once reports come out about other retailers affected by the breach, they are only going to add fuel to the fire.

Believe it or not, there is good news. You will likely have a good opportunity to profit from the current and upcoming decline in debit card usage, which I believe will be a sustainable trend until much safer debit cards are issued.

Who will benefit?If you've read my work before, then you already know that I believe Target's data breach will lead to market-share gains for Wal-Mart and Amazon.com. However, this is a short-to-medium-term trend, and the following information doesn't pertain to these market-share shifts.

If debit card usage is on the decline due to widespread fear, then consumers are either going to use cash or their credit cards. While many people will switch back to cash, this is like moving backward, and people aren't necessarily safer carrying cash around than they are using debit cards. With a credit card, on the other hand, you are only responsible for fraudulent purchases of up to $50. When you use a debit card, you could be held responsible for fraudulent purchases of up to $500, and sometimes even more. This depends on how quickly you report the fraudulent charge.

The point here is that credit card usage is likely to be on the rise. That being the case, companies like American Express and Discover Financial Services (NYSE: DFS) are likely to benefit from this trend. Discover should see more transactions after the Target data breach, and Discover's membership levels should increase over time. Discover Financial Services reports on January 23. It's possible that I'm incorrect about transactions rising for the quarter. However, even if that's the case, Discover is highly likely to benefit from current consumer trends in regard to preferred forms of payment.

Two other companies that might benefit from the Neiman Marcus data breach (not the Target data breach) are Macy's (NYSE: M) and Nordstrom (NYSE: JWN) . Macy's owns Bloomingdale's, which is a competitor to Neiman Marcus -- both attract the high-end consumer. Nordstrom is also a competitor to Neiman Marcus, also attracting the high-end consumer. However, these are short-term trends, and Neiman Marcus should recover. Also keep in mind that Macy's and Nordstrom might be susceptible to similar breaches. Foolish investing is all about the long term. Therefore, you might want to look at Discover first.

The bottom lineThe data breaches at Target and Neiman Marcus have led to a great deal of consumer mistrust in debit cards. Consumers will still spend money, either with cash or credit cards. Whether Discover will benefit from this trend right away is unknown, but the odds of Discover's customers making more transactions throughout 2014 are good. Therefore, you might want to dig deeper on Discover as a potential investment. Please keep in mind that these are just ideas, and that you should always do your own research prior to making any investment decisions.

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